Cochrane, Inc., is considering a new three-year expansion project that requires
ID: 2759885 • Letter: C
Question
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,490,000. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $2,280,000 in annual sales, with costs of $1,270,000. The project requires an initial investment in net working capital of $163,000, and the fixed asset will have a market value of $188,000 at the end of the project. Assume that the tax rate is 30 percent and the required return on the project is 8 percent.
What is the net cash flow of the project for the following years?
What is the NPV of the project?
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,490,000. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $2,280,000 in annual sales, with costs of $1,270,000. The project requires an initial investment in net working capital of $163,000, and the fixed asset will have a market value of $188,000 at the end of the project. Assume that the tax rate is 30 percent and the required return on the project is 8 percent.
Requirement 1:What is the net cash flow of the project for the following years?
Requirement 2:What is the NPV of the project?
Explanation / Answer
1.
Year
1
2
3
Depreciation rate
33.33%
44.45%
14.81%
Beginning book value of fixed assets
$ 2,490,000.00
$ 1,660,083.00
$ 553,278.00
Depreciation
$ 829,917.00
$ 1,106,805.00
$ 368,769.00
Ending book value of fixed assets
$ 1,660,083.00
$ 553,278.00
$ 184,509.00
Year
0
1
2
3
A
Initial investment
-$ 2,490,000.00
Net working capital
-$ 163,000.00
B
Annual sales
$ 2,280,000.00
$ 2,280,000.00
$ 2,280,000.00
Cost of sales
-$ 1,270,000.00
-$ 1,270,000.00
-$ 1,270,000.00
Depreciation
-$ 829,917.00
-$ 1,106,805.00
-$ 368,769.00
Income before taxes
$ 180,083.00
-$ 96,805.00
$ 641,231.00
Taxes @ 30%
-$ 54,024.90
$ 0.00
-$ 192,369.30
Income after taxes
$ 126,058.10
-$ 96,805.00
$ 448,861.70
Depreciation
$ 829,917.00
$ 1,106,805.00
$ 368,769.00
Free cash flows
$ 955,975.10
$ 1,010,000.00
$ 817,630.70
C
Market value of fixed asset
$ 188,000.00
Book value of fixed asset
$ 184,509.00
Gain on sale of fixed asset
$ 3,491.00
Tax on gain
$ 1,047.30
Net receipt on sale of fixed asset
$ 186,952.70
D
Release of working capital
$ 163,000.00
Net cash flow
-$ 2,653,000.00
$ 955,975.10
$ 1,010,000.00
$ 1,167,583.40
2.
Year
Cash flow
Present value factor @ 8%
Present value of cash flow
0
-$ 2,653,000.00
1
-$ 2,653,000.00
1
$ 955,975.10
0.9259
$ 885,137.35
2
$ 1,010,000.00
0.8573
$ 865,873.00
3
$ 1,167,583.40
0.7938
$ 926,827.70
$ 24,838.05
Net present value = $24,838.05
Year
1
2
3
Depreciation rate
33.33%
44.45%
14.81%
Beginning book value of fixed assets
$ 2,490,000.00
$ 1,660,083.00
$ 553,278.00
Depreciation
$ 829,917.00
$ 1,106,805.00
$ 368,769.00
Ending book value of fixed assets
$ 1,660,083.00
$ 553,278.00
$ 184,509.00